Volkswagen Recalling Diesels in January for ‘Defeat Device’

Volkswagen’s new CEO Matthias Mueller hopes to see a recall affecting as many as 11 million of the German maker’s diesel vehicles begin in January – but for the 482,000 of those cars sold in the U.S., VW must still win regulatory approval for the planned retrofit.

Even as Volkswagen moves ahead with plans to fix vehicles equipped with software designed to cheat on emissions tests, its problems are mounting. Among other things, the Senate Finance Committee has opened a probe investigating whether the carmaker falsely claimed more than $50 million in tax credits for meeting emissions standards.

"If all goes according to plan, we can start the recall in January. All the cars should be fixed by the end of 2016," Mueller says in an interview published today by the German newspaper, the Frankfurter Allgemeine Zeitung, or FAZ.

But that timetable might be difficult to meet, especially in the U.S., where the scandal was originally touched off last month.

The Environmental Protection Agency revealed that VW had used a so-called “defeat device,” software coded into its engine control system, to detect when vehicles using its WA 189 engine were undergoing emissions tests. Otherwise, the 2.0-liter diesels were programmed to emit as much as 40 times the allowable levels of toxic gases such as oxides of nitrogen, or NOx. The scam was apparently developed when the engineering team was unable to meet a goal of low emissions, good power and high mileage.

Several sources within VW said that the automaker is currently meeting with the EPA to get regulators’ approval for a proposed fix that would meet emissions standards. But it must demonstrate that the solution not only works initially but that it will continue to comply with pollution mandates for 150,000 miles. Complicating matters, VW has revised the U.S. version of the WA 189 engine twice since it was introduced seven years ago.

The subterfuge has generated a tidal wave of bad press for Volkswagen, and a mounting series of legal problems. The automaker has already launched its own internal investigation and Mueller said in his Wednesday interview that he believes the scam was the work of only a handful of employees. But it has already led to the ouster of his CEO predecessor, Martin Winterkorn, and the suspension of several other key engineering executives.

Winterkorn, in turn, has come under investigation by German federal prosecutors and could become a target in a separate criminal probe by the U.S. Justice Department. Adding to VW’s legal woes, the chairman and the top Democrat on the Senate Finance Committee have sent a letter to the company raising the question of whether it claimed clean air credits of up to $1,300 a vehicle under “false representations to the U.S. government.”

The 482,000 vehicles equipped with the defeat devices were “included (with) those that the company certified as qualifying for the advanced lean-burn technology motor vehicle credit,” wrote Senators Orrin Hatch, a Utah Republican, and Ron Wyden, an Oregon Democrat.

VW already faces potential fines of up to $18 billion for failing to comply with the Clean Air Act. It could be in for additional penalties if the Justice Dept. investigation moves forward. Meanwhile, as many as a half-dozen class action lawsuits on behalf of owners have already been filed.

Among other issues, lawyers are likely to argue that the value of used VW diesels have fallen as a result of the scandal. A preliminary study by Kelley Blue Book found that in the weeks after the story broke the average auction price of models like the Passat, Jetta and Golf TDI models tumbled 13%.

VW’s legal problems aren’t limited to the U.S., however, with investigations underway, and lawsuits already filed, in countries stretching from Italy to South Korea.

The automaker has already set aside $7.3 billion to cover the cost of the scandal, a figure most analysts believe will fall well short of the final tally. And VW has given clear signs it agrees. Senior officials, as well as the labor leaders who participate in VW management, have warned of reduced profits and the likely need for major cutbacks in spending.

"We will need to call into question with great resolve everything that is not economical," Bernd Osterloh, head of VW's works council said during a meeting this week attended by more than 20,000 workers at a VW’s headquarters in Wolfsburg, Germany.

The scandal seems all but certain to short-circuit Volkswagen’s aggressive global growth plans. The maker nudged past Toyota to become the world’s best-selling auto manufacturer during the first half of this year. But just the hold it has placed on selling the affected diesels could set it back into second for all of 2015.

And VW management now appears to be rethinking its growth strategy, among other things looking at planned model-line expansion plans and perhaps raising questions about some brands, such as the ultra-exclusive Bentley, CEO Mueller told the FAZ.

While he insisted the maker will “shine again,” once it works through the crisis, he acknowledged it could take several years – and could leave it smaller.

"This crisis gives us an opportunity to overhaul Volkswagen's structures," Mueller said. "We want to make the company slimmer, more decentralized and give the brands more responsibility.”